Worldwide convergence of productivity levels: recent empirical evidence

Business Economics, Oct, 1991 by Janice Turtora Zagardo

This paper examines international productivity trends from 1960 to 1985 using a new approach. Convergence of productivity levels is tested for in a worldwide sample using output per worker data, adjusted for purchasing power parity. In addition, the countries are grouped by literacy rates circa 1960, into six subgroups for convergence tests. Convergence is documented in the most literate group of countries, and in the group with slightly above-average literacy rates. As expected, convergence does not occur in the whole sample. Furthermore, base-period literacy rates are significant indicators of productivity growth for the whole sample and for the most literate country group.

DO LOW-PRODUCTIVITY countries have an advantage of backwardness that affords them rapid productivity growth? According to the convergence theory, low-productivity countries with adequate technological skills and market development can borrow cost-reducing technology from higher-productivity countries to achieve rapid productivity growth. Economic historians have noted that the initial gap in productivity with the industrial leader, in addition to rapid contemporaneous growth in technological knowledge, represents an opportunity for swift productivity gains. These are the necessary conditions for rapid growth.

This paper examines recent trends in output per worker in 109 countries to determine whether productivity converged in the 1960 to 1985 period. Literacy rates are used to group countries with similar potential for convergence. The approach used here builds on the methodology employed in Baumol (1986) and Kravis and Lipsey (1984), among others. Regressions of initial productivity levels on rates of change will illustrate whether the grouping of countries has an impact on the strength of the recorded convergence process and whether convergence was strongest among the industrialized countries that were initially well prepared to reap the benefits of technological progress that occurred in the United States after the war years.

STUDIES OF CONVERGENCE

Denison (1967), Abramovitz (1979, 1986), and Baumol (1986), among others, have noted that, within certain groups of countries at comparable stages of development, nations with low levels of relative labor productivity tend to experience the fastest rates of subsequent productivity growth, i.e., they tend to catch up with the lead productivity country over time. Abramovitz (1979) generalized by stating that within a group of ten industrialized countries "the less productive the country in 1950, the more rapidly its productivity rose."

The studies in the literature share a common foundation. The initial lag in productivity is described as a technological opportunity for the lower-productivity countries, assuming the existence of sufficient absorptive capacity and resources. A country can only reap the benefits of this backlog of technological innovations once it has overcome the major social and political barriers to industrialization, according to Gerschenkron (1962). He points out that even then the development of a backward country is likely to follow a path very different from that of a more advanced industrialized country.

A country's degree of backwardness is defined in Abramovitz's model by its initial productivity gap with the industrial leader. When old capital is replaced by new capital in the lead country, the technological frontier advances by the amount of new knowledge acquired since the old equipment was installed. The technological backward countries can increase their technological frontiers much further, because their plants and equipment are likely to be technologically older than their chronological age. This presents the opportunity to advance more -- in absolute terms -- than the lead country when replacing obsolete capital. The more technologically backward a country, the faster its potential rate of growth in labor productivity, which increases both with the capital/labor ratio and the level of technology embodied in a country's capital stock.

Determinants of Productivity Growth Rates

The pace at which the gap is closed depends on several factors, including market openness, labor mobility, and the investment environment that determines the rate of capital accumulation and technological change. Kendrick (1979, 1981) and Abramovitz (1986) spell out several factors, common to many productivity studies, that determine the actual speed of productivity growth. These include embodied and disembodied technological change that leads to productivity enhancing innovations, the exploitation of scale economies, the reallocation of labor and capital to their most productive employment (structural change), and capital accumulation, which increases the capital-labor ratio.

A country must have access to large markets if the leader's path of technological progress is scale dependent. A laggard country cannot reap the benefits of large-scale manufacturing innovations in the U.S., for example, if its markets are small and its trade is restricted. The reduction of market distortions, trade barriers, and transport costs in the early 1900s expanded the industrialized countries' markets and provided the change for them to improve resource allocation and productivity growth. Growing markets gave them the opportunity to take advantage of scale economies by modifying their production processes. Industries operating under increasing returns benefits by converting to scale-dependent production methods as national product increases and markets expand.